The Takeaway

Bitmain is planning to deploy 200,000 units of its own mining equipment in China to take advantage of cheap hydroelectric power this summer.

The equipment is conservatively estimated to cost $80 million, but it may be more profitable right now for Bitmain to mine crypto itself than try to sell all this inventory.

The move signals a broader shift in the market, with miners preparing to invest again following last year’s contraction in capacity.

Bitmain, the largest manufacturer of cryptocurrency mining equipment by market share, is scaling up its capacity to mine ahead of an expected drop in electricity costs in China this summer.

According to mining farm operators in China’s southwestern provinces familiar with Bitmain’s plan, the Beijing-based company will be deploying about 200,000 units of its own mining equipment in the area to take advantage of the low electricity costs during the summer resulting from excess hydropower.

Though the rainy season in southwestern China, including Sichuan and Yunnan, will not arrive until May, Bitmain has already started discussions and making deals with farms to host its equipment so that it can be fully prepared, the sources said.

The firm will mostly use its new products such as the AntMiner S11 and S15, the sources added, with some older models like the AntMiner S9i/j. (The latest models S11, S15 and T15 are all marked as sold out on Bitmain’s ownonline shop.) It’s unclear which proof-of-work cryptocurrencies the company will mine using the machines.

Still, that’s a non-negligible opportunity cost, for a firm whose revenue comes predominantly from equipment sales rather than self-mining.

The S9j and S11 retail for $400 and $500 on its website, respectively, so 200,000 units of those models would be worth around $80 million to $100 million if Bitmain could sell all the inventory. And that doesn’t include the S15, which is priced at around $1,000.

But under current conditions, self-mining with S9j, S11 and S15 might still be a somewhat safer bet than trying to sell all those machines in a bear market, according to the miner profit indextrackedby the world’s third-largest mining pool f2pool.

The index shows that a single S9j, S11, and S15 can generate a daily profit of $0.87, $1.8 and $2.88, respectively, based on bitcoin’s current price and a benchmark electricity cost of $0.05 per kilowatt hour.

While it’s unclear what electricity deal Bitmain can get eventually, mining farm operators said the cost in the summer on average is around $0.037 per kilowatt hour. Taking that into f2pool’s index equation, each S9j, S11 and S15 could return a daily profit of $1.29, $2.24, or $3.38, respectively.

Even assuming the 200,000 machines will all be the lower-end S9j, the capacity could potentially bring home a monthly profit of about $7.7 million for Bitmain.

When reached by CoinDesk, a spokesperson for the company declined to comment.

Market shift

The imminent scaling up of Bitmain’s operations signals a notable market shift.

Last year, amid an overall cryptocurrency market slump, more than 600,000 bitcoin miners wereestimatedto have shut down at one point. This led to an increasing supply of second-hand mining equipment that was sold at a discount, such as the AntMiner S9.

The decline of mining activity last year had also been reflected in changes at Bitmain’s existing proprietary mining operations.

According to thearchive pageof Bitmain’s hash rate disclosure blog, on Oct. 9, 2018, all Bitmain-owned hardware that was mining the SHA265 algorithm-based bitcoin generated a hash rate of about 2,339 quadrillion hashes per second (PH/s).

Assuming Bitmain’s self-mining hash rate all came from the AntMiner S9 – each having a hash rate of about 14 trillion hashes per second (TH/s) – that suggests the company had about 170,000 machines running at the time. (1PH/s equals 1,000 TH/s.)

But as of March 5, the hash rate of Bitmain’s operations haddecreasedto 1,692 PH/s, implying, under the same assumptions, that the company unplugged about 50,000 miners over the past several months and had around 120,000 sets of equipment running in early March.

The hash rate of the bitcoin and bitcoin cash networks on that date was about 44,973 PH/s and 1,500 PH/s, respectively, meaning Bitmain’s proprietary mining contributed around 3.6 percent of the SHA265 algorithm-based networks’ combined computation early this month.

Now, it looks as though things are about to change.With excess electricity generated by hydropower stations in China’s mountainous southwest that could be as low as $0.037 per kilowatt hour, the opportunity to mine profitably again hasattractedan influx of miners to the region.

Assuming Bitmain’s new capacity will all be using its new AntMiner S11 with a 19.5 TH/s hash rate, the 200,000 units of planned new capacity means the company could be adding another 3,800 PH/s of computing power.

Currently, the bitcoin network hash rate is around 48,000 PH/s, according todatafrom Blockchain.info, so all else equal, Bitmain’s investment could increase the amount of computing power devoted to securing the network by 7.9 percent.

To be sure, it’s unclear at this stage how much the hash rate of the whole bitcoin network will be in the coming wet season. But some haveestimatedit could climb up to 70 quintillion hashes per second (EH/s), above the network’s all-time-high around 60 EH/s, because of the new investments being made by Bitmain and other miners.

Drop in the bucket

That said, it’s important to note that proprietary mining, which once accounted for a significant slice to Bitmain’s revenues, hasshrunk in percentage termsto a sliver of the total.

According to financial results disclosed by Bitmain when it filed for an initial public offering on the Hong Kong Stock Exchange last September, self-mining revenue dropped from 20.3 percent of the total in 2015 to 7.9 percent in 2017 and was just 3.3 percent for the first half of 2018.

Meanwhile, the company’s top line has increasingly relied on the sales of mining hardware, which increased from 78.6 percent of total revenues in 2015 to 80.5 percent in 2017, and reached 94.3 percent for the six months ending June 30, 2018.

However, the bear market for crypto has taken its toll, especially in the second half of last year.

According to unreleased financial data previously reported by CoinDesk, Bitmainsuffereda net loss of around $500 million during the third quarter of 2018.

As of June 30, 2018, Bitmain had opened 11 mining farms located in Sichuan, Xinjiang, and Inner Mongolia with an aggregated capacity to store about 200,000 sets of mining hardware.

These farms are used for self-mining and hosting others’ miners, and are separate from the ones where the company is now deploying its machines.

The companydisclosedthat its self-mining hash rate in July 2018 was about 1692 PH/s, meaning Bitmain had about 120,000 machines running at the time.

After U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton backed a colleague’s analysis that tokens like ethereum may not be securities this week, panelists at the TOKEN2049 event are raising questions over one criteria suggested by the regulators.

Asked whether and how regulators have the power to define a threshold that William Hinman, SEC director of corporation finance, described last year as “sufficiently decentralized,” Gabor Gurbacs, Digital Asset director at VanEck, said he believes “it’s downright stupid to say if something is sufficiently decentralized, it’s not a security.”

Gurbacs’ firm has been closely working with regulators in the U.S. in its attempt to launch trading of the first bitcoin-based exchange-traded fund (ETF). He explained that, to a certain extent, even the traditional financial market could be seen as decentralized, such as the exchange-traded fund system or other capital market functions. “But they all fall under the security law,” he said.

Using the basis of being “sufficiently decentralized” to determine whether a crypto asset is a security was brought up by Hinman during a speech in June 2018, during which he said:

“If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”

In a letter responding to Congressman Ted Budd and industry advocacy group Coin Center dated March 7, Clayton said he agreed with Hinman’s analysis that found ethereum, the world’s second-largest cryptocurrency, likely does not qualify as a security.

In the TOKEN2049 panel, Sandra Wu, founding partner of Hong Kong-based venture firm Origin X Capital, also weighed in, saying that while Hinman’s comments explained a stance on projects that issue tokens as a centralized organization, it does not clearly explain the case for projects like ethereum where tokens were issued from an organization that, arguably, has grown more decentralized since.

She said:

“What about everything in between (the two situations), where you have the birth of a network but it takes time (for the ownership of the tokens) to become sufficiently decentralized? The SEC has not given guidelines on everything in between.”

Gurbac also reiterated that the SEC has, in fact, still not given a formal ruling that ethereum is not a security, and that he doesn’t think there will be a decision soon. That’s also a reason why his firm exclusively focuses on pushing an ETF with bitcoin as an underlying asset, which is treated as a commodity by the commission.

“Make no mistake the chairman of the SEC never said ethereum is not a security. Director Hinman only said … right now, it may not be a security,” Gurbacs said, concluding:

“If ethereum for instance is not a security, it will set as a precedent and everyone will start raising a ton of money and say my token is something sufficiently decentralized.”

Canaan Creative, the maker of Avalon miners and one of the biggest cryptocurrency mining equipment manufacturers in China, has closed a new funding round.

Securities Times, a Chinese financial news publication, reported on Monday that the company has raised “several hundred million U.S. dollars” in a new funding round, which will value the firm at over $1 billion.

When reached out for comment, a spokesperson for Canaan declined to comment on the issue or questions regarding the exact amount or which investors participated in the round.

The news comes months after Canaan’s application for an initial public offering (IPO) on the Hong Kong Stock Exchange failed to advance to a listing hearing and subsequently became invalid. It was reported in January that the firm was planning another IPO application to go public in New York.

The fund raise also followed a continuous decline of the overall cryptocurrency market since the second half of 2018, which has had an impact on crypto mining equipment makers in terms of their product sales.

For instance, Canaan’s two major rivals Bitmain and Ebang both filed for IPOs in September and June 2018 respectively. However, in a renewed filing at the end of December, Ebang disclosed that it experienced “significant decreases in revenue and gross profit” for Q3 2018.

Similarly, Bitmain also posted about $500 million loss in an updated financial record filed with the Hong Kong Stock Exchange as part of its IPO application. If Bitmain does not graduate to a listing hearing by March 26, six months from the initial filing, its IPO application will lapse.

Canaan Creative, one of the biggest cryptocurrency mining equipment manufacturers in China, has closed a new funding round.

Securities Times, a Chinese financial news publication, reported Monday that the company, known for its Avalon line of mining devices, has raised “several hundred million U.S. dollars,” valuing the firm at over $1 billion.

When contacted by CoinDesk, the firm declined to comment. However, two sources close to the company confirmed the raise without disclosing further details.

The news comes months after Canaan’s application for an initial public offering (IPO) on the Hong Kong Stock Exchange failed to advance to a listing hearing and subsequently became invalid. It was reported in January that the firm might be planning another IPO application in New York.

The funding effort also comes amid the decline in the overall cryptocurrency market, especially over the second half of 2018, which has had an impact on crypto mining equipment makers in terms of product sales.

For instance, Canaan’s two major rivals, Bitmain and Ebang, both filed for IPOs in September and June 2018 respectively.

However, in a renewed filing at the end of December, Ebang disclosed that it experienced “significant decreases in revenue and gross profit” for Q3 2018. Similarly, Bitmain also posted about $500 million loss in an updated financial record filed with the Hong Kong Stock Exchange as part of its IPO application.

If Bitmain does not graduate to a listing hearing by March 26, six months after the initial filing, its IPO application too will lapse.

Ethereum mining pool Sparkpool has located and verified the accidental sender of an unusually high miners’ fee and agreed to split the amount.

In a statement provided to CoinDesk, Sparkpool said it received an email from an anonymous user on Feb. 25, claiming that they had made a mistake by attaching the 2,100 ether (ETH) fee on Feb. 19 – an amount worth around $300,000 at the time.

To verify that the emailer was indeed the sender of the payment, Sparkpool replied at on Feb. 25, asking that a token amount of 0.022517 ETH be sent using the same 0x587 address to the pool’s address.

According to data on Etherscan, the owner sent the requested amount of ETH at 09:15 UTC the same day, after which Sparkpool agreed to negotiate on the next step, adding in the statement the sender is from a blockchain firm based in South Korea.

The final agreement now sees Sparkpool keep half of the 2,100 ETH for pool miners entitled to the reward and returning the other half to the South Korean firm.

After another request from Sparkpool, the owner of the 0x587 address made a second transaction of 0.666 ETH to Sparkpool with a paragraph coded into the transaction’s hash to confirm the agreed split at 05:49 UTC today (March 11).

It reads:

“Thank you SparkPool and your miners for helping us to recover our loss, we are willing to share half of 2,100 ETH with the miners to thanks the miners’ integrity.”

Switzerland’s primary stock exchange SIX could soon list another cryptocurrency-based exchange-traded product (ETP), which will track the price of XRP, the third largest crypto asset by market capitalization.

Hany Rashwan, co-founder and CEO of the Swiss company Amun AG – which already offers several crypto ETPs – told CoinDesk in an interview that his firm has received approval from SIX to issue the XRP-linked ETP with the ticker name AXRP, adding:

“We can comfortably say that we expect to release the world’s first XRP ETP within the next two months.”

Besides XRP, Rashwan said that Amun has also obtained clearance to issue ETPs linked to four more single crypto assets, including bitcoin cash (BCH), litecoin (LTC), stellar lumens (XLM) and EOS.

While the exact time to launch these products is not yet fully finalized, and will based on buyer interest, he said the firm plans to list all the eligible and approved crypto ETPs on SIX by the end of this year.

The SIX exchange listed its first ETP that tracks a basket of the top weighted crypto assets in November 2018. That product was issued by Amun for retail and institutional investors under ticker name “HODL” – slang in the cryptocurrency community for holding rather than selling assets.

Since its listing, the total monthly trading volume for HODL has taken over that of XETC – an ETP that tracks crude oil – and became the top traded ETP on SIX in December and January, according to data provided by the SIX exchange (see chart below).

However, the price per share for HODL – which tracks BTC, ETH, XRP and LTC – has dropped from $15 in November to around $13 currently, reflecting the overall crypto market decline. In February, its market turnover also dropped to second place, with about $4 million changing hands.

In the past few weeks, Amun has also issued bitcoin and ethereum ETPs on the SIX exchange. Rashwan added that to date, most of the buyers for its crypto ETPs are based in Switzerland, while it also has demand from overseas investors with access to the Swiss markets in compliance with their nations’ securities laws.

Fully collateralized

According to listing rules enforced by SIX, since ETPs are passive investment instruments with no active trading strategies involved, they are not treated as collective investment schemes that are subject to the approval or supervised by Switzerland’s market regulator, the Federal Financial Market Supervisory Authority (FINMA).

That said, structural features of crypto ETPs must nonetheless fulfill requirements with respect to investor protection efforts, based on SIX’s practice circular for listing derivatives.

For instance, Rashwan explained, each unit of Amun’s crypto ETPs has to be collateralized and backed by an identical amount of crypto assets which is checked continuously.

“The collateral also has to be kept at an independent qualified custodian. The calculation of the price is checked multiple times a day by several parties,” he said.

Amun stores its collateral with Kingdom Trust, a custodian for both traditional and crypto assets registered with the Securities Exchange Commission in the U.S., and is planning to add more custodians in different jurisdictions as it plans to list more crypto ETPs.

SIX’s circular indicated that only the top 15 cryptocurrencies by market capitalization on CoinMarketCap at the time of application can be considered for trading. It further specifies only cryptocurrencies that are “based on open-source software that function according to the principles of blockchain” are permitted as underlying instruments.

“Tokens, in the sense of units from a project, which are often issued as part of an initial coin offering, are not permitted as underlying instrument,” the stock exchange states.

Tokenizing ETPs

Looking ahead, Amun is also planning to launch an ERC-standard token administrated by its own platform and running on the ethereum blockchain that it will use for tokenizing ETPs.

The goal is to allow both itself and third parties to tokenize both crypto ETPs and traditional ETPs, such as those that track gold, so that the tokens can be traded on securities token exchanges.

Currently, the SIX also building its own digital exchange in a bid to use distributed ledger technology to speed up settlements and trade tokenized assets. It recently chose R3’s Corda Enterprise platform to develop the infrastructure, with a plan to launch the SIX Digital Exchange in the second half of 2019.

Rashwan said:

“I don’t think we will have a real licensed and regulated securities token exchange with a professional partner in a reputable country until late this year or early next year – that’s my guess. But when that happens, we will be ready with three to five tokenized ETPs, including our own and others’.”

Former employees of cryptocurrency mining and manufacturing giant Bitmain who focused on bitcoin cash development are planning a new startup that will offer crypto financing-related services, CoinDesk has learned.

According to two sources with knowledge of the matter, the former employees include those from the mining giant’s Copernicus project that was impacted by a company-wide layoff last year.

The sources said the former Bitmain team members are planning to launch a new firm that will provide services such as cryptocurrency custody, over-the-counter (OTC) trading and crypto lending.

One of the sources said it’s known in the industry that there have been two camps inside Bitmain – one aligned with co-founder Jihan Wu that focuses on blockchain and bitcoin cash development and the other with co-founder Micree Zhan that designs crypto mining chips.

And the team forming the new startup mostly comes from Wu’s old crew, the source added, including those from Copernicus, a project Bitmain rolled out in 2018 to boost development for bitcoin cash and the wormhole protocol. The project has had no technical updates onGithubsince December of last year amid the company-widelayoffs.

It is unclear how many former Bitmain employees will be involved in the new venture at this stage. A second source told CoinDesk it may also have the name of Yuesheng Ge, a major shareholder of Bitmain, on the new firm’s incorporation paper, but not Wu’s name. And the first source indicated it’s known that Ge has long been aligned with Wu in Bitmain’s operations.

A Chinese media outlet previouslyreportedthat former Bitmain employees are launching a new startup called Matrix but did not provide details about what the firm aims to do. The report also said Wu may take charge of the project in the future while Ge will serve as the new company’s CEO in the meantime.

A spokesperson for Bitmain said “no comment” when contacted by CoinDesk regarding the former staff’s plan and potential involvement of the company’s two major shareholders, Ge and Wu. However, the spokesperson said Wu will not be leaving Bitmain.

IPO pending

According to the initial public offering prospectus (IPO) Bitmain filed with the Hong Kong Stock Exchange (HKEX) on Sept. 26, 2018, Ge owns about four percent of the firm’s total shares and was listed as an executive director of the board and principal of investment.

In November, a business registration changeindicatedGe and Wu had both left the board of Beijing Bitmain Technology, a subsidiary of BitMain Technology Holding Limited, the entity that’s applying for the IPO.

Another source familiar with Bitmain’s IPO process told CoinDesk that when the firm updated its financials with the HKEX in recent months, Ge remained as an executive director and there was no change to the positions of Wu and Zhan as the company’s co-CEOs.

But this source added that if Bitmain’s holding company disclosed any substantial change to its management, its IPO would almost certainly fail since the HKEX has a clear requirement for a listing applicant to maintainmanagement continuityduring its track record.

If Bitmain does not graduate to a listing hearing by March 26, six months from the initial filing, its IPO application will lapse. This has already happened for two of its mining rivals, Canaan Creative and Ebang, although the latter has filed a new application.

The HKEX is said to be reluctant to approve IPOs for these firms due to questions about the sustainability of the mining business.

Bitcoin miners in China are buying used equipment and making deals with mining farms and hydroelectric plants, betting abundant water this summer will make their businesses profitable again.

That’s because during this season a significant amount of excess electricity is expected to be generated by hundreds of hydropower stations, especially in China’s mountainous southwestern provinces of Sichuan and Yunnan. This level of excess power results in competitive electricity costs for bitcoin miners, making it perhaps one of the rare opportunities to earn profits in the current bear market that has already impacted the mining sector.

Hashage, a company based in the city of Chengdu in Sichuan that operates six mining farms with a supply of about 200,000 slots for machines, for example, said the electricity cost in Sichuan during the summer – which may vary from hydropower plants – is usually around 0.25 yuan, or $0.037, per kilowatt hour (kWh) for hosting equipment for miners.

Xun Zheng, the company’s CEO, told CoinDesk that over the past month the firm has been talking to individual miners and larger mining farms with a total demand of more than 1 million slots for deploying mining chips. According to Zheng, individual miners on average are looking to host 1,000 to 3,000 units of mining equipment each, while larger farms are eyeing at a larger scale of over tens of thousands of machines.

He added although the exact electricity costs with local hydropower stations won’t be finalized until the end of March, miners have already started looking for resources and negotiating deals with mining farms before the season comes so that they have enough time to ship equipment to the mountains and set them up.

“The interest is definitely there,” Zheng said, adding most of the miners that have shown enthusiasm are from China’s Inner Mongolia and Xinjiang provinces, where they operate mining farms using fossil power plants. The electricity costs there are usually around 0.35 yuan, or $0.052, per 1 kWh.

Even just the difference of 0.01 Chinese yuan ($0.0015) is significant for bitcoin miners, especially in the current bear market when one bitcoin is worth about $3,700 as of press time.

Take for example, Bitmain’s AntMiner S9, which consumes about 30 kWh per day, only one kilowatt-hour more than the average U.S. home in 2017.

That means for each machine, an additional $0.045 can be saved per day from the seemingly negligible difference. For a miner that has 10,000 machines, that’s a difference of $450 per day, and $13,500 a month.

Second-hand in demand

Adding to this level of interest is also the relatively cheap cost of buying second-hand bitcoin ASICs, especially used AntMiner S9s, Zheng said.

According to him, a used S9, depending on the level of damage, could be bought for about $150, with a computing capacity of a bit over 10 trillion hashes per second (TH/s).

Indeed, somewholesalers in China are currently selling second-hand S9s on the e-commerce marketplace Alibaba for $100 to $200 each. While manufacturer Bitmain’s officialwebsite lists the price of brand new S9 to be around $450, otherwholesalers are advertising alternative channels for users to buy new S9 equipment for around $300.

Tyler Xiong, chief marketing officer ofmining pooland wallet service Bixin, echoed that point, saying the last round of miners shutting down operations at the end of 2018 resulted in the increased availability of second-hand equipment.

“S9 is now like the AK-47 [assault rifle] in ASICs,” Xiong said. “It now has the best performance over cost ratio in the market.” Bixin is also planning to increase its own mining capacity in Sichuan during the summer but declined to disclose its planned scale ahead.

Summing up all the estimated supplies provided by major mining farms in the area, Zheng projects there will be a total of about 1.5 million slots available.

He explained that it’s a common practice for mining farms to sign agreements with power stations to purchase 80 percent of the plants’ capacity in advance. That means that whether or not a mining farm has enough miners to consume all the pledged amount, it has to pay for what it has agreed on, one way or another.

Because of that, Zheng said besides hosting machines for miners, his firm also plans to deploy around 20,000 ASICs to mine on its own behalf, with second-hand machines bought on the market.

He further estimated that the entire bitcoin network hash rate could even go up to 70 quintillion hashes per second (EH/s) in the summer, which is well above the network’s historical high of 61 EH/s, recorded in the summer of 2018.

In fact, over the last two months, bitcoin’s hash rate has already shown steady growth, from an average around 35 EH/s in early January to now around 42 EH/s, according todatafrom blockchain.info.

“We used to think the overall supply would be larger than the demand. But the total quantity of ASICs on the market, plus new machines produced by major manufacturers, can certainly fill in the total supply. The question now is how many miners will take this bet,” Zheng said.

Market shift

But every year in the summer, there’s plenty of rain and water in theGarzeandNgawaTibetan prefectures in western Sichuan, where many of these mining farms are located.

What makes this year different from previous years, though, is a shift in market dynamics.

Yun Zhao, a co-founder of Hashage who has left the firm’s management to start a miner organization in Sichuan called Mining Sea, explained that the market used to be on the side of mining equipment makers as well as mining farms.

“In the bullish market, it was hard to buy mining equipment, it was hard to find available slots in mining farms, because the electricity cost wasn’t too big of an issue,” Zhao told CoinDesk.

That’s also the reason he started the organization in Sichuan in the first place this year, aiming to improve liquidity between mining farms’ supplies and demand from miners.

Xiong of Bixin shared the same view. “In this round, the market’s dominance will shift to miners and whatever farms that can get the cheapest electricity cost. They are the ones that can really rock,” he said, adding:

“Mining equipment makers probably won’t have much sense of participation in this round [in terms of selling new machines] since people may prefer used ones. So, the market is no longer on their side now.”

Excess power supply

Further adding to the current level of interest is also an openness from local governments to let privately owned hydropower stations participate in a more market-driven electricity trade so that excess energy can be sold to private companies in energy-intensive industries.

Stepping back, privately owned hydropower plants in China can be divided into two categories: those that are integrated with the country’s State Grid and those that are not.

For those that are eligible for the integration, the State Grid would typically buy a certain agreed amount of electricity from them so their sources of income could be steady. But for those that are not, they need to compete for steady customers that consume generated energy.

The Sichuan provincial government issued anoticein August 2018 as a practical guide to “deepen the electricity reformation” in the region.

Although the notice did not mention any specific industry, it emphasized “enlarging the scope of customers that can participate in electricity trades” while “reducing administrative interference in the market.”

The end goal would be to better utilize the excess electricity generated in the area, which would otherwise be wasted. The notice also mentioned the government would continue the experiment of establishing industrial parks near plants that have significant excess power.

According to another noticeissuedby the Garze prefecture government, hydropower plants in the area generated 41.5 billion kWh of electricity just in 2017 with a total excess of 16.3 billion kWh that went to waste.

It’s still a bet

But even with this alluring opportunity, the risk still remains.

Both Zhao and Zheng said the main risk lies in the possibility of bitcoin’s price dropping below a threshold of $3,000, even with cheap electricity costs. According to the revenue index for mining machines provided by f2pool, the fourth largest mining pool by hash power, mining with an S9 at an average electricity cost of $0.05 per 1 kWh can still generate a marginal daily profit of $0.60 per machine.

“But if the price falls below that threshold of $3,000 during the summer, lots of miners may have to pull the plug again,” Zhao added.

Although it’s a common practice for miners to short bitcoin futures contracts to hedge potential losses, Zhao said a potential risk in that situation is there may not be enough counterparties to take the long positions.

He added another long-time issue in the industry is a lack of self-governance to protect miners from bad actors, which is an area where the Mining Sea organization aims to improve on by updating their members about any bad conduct from mining farms if found.

For instance, he said there were cases where mining farms secretly switched the network address of mining equipment they hosted for customers to that of their own at 2 a.m. in the morning just for two hours to mine for themselves.

Zheng said there were also mining farms that lured miners with the promise of cheap electricity rates but then jacked up the price after they set up machines.

“Those miners had no choices but to suck it up,” he added, referring to recent localreportsthat similar situations happened in China’s Qinghai province.

Zheng concluded:

“This industry is always about making a bet after all. There are always risks from multiple aspects, especially from the markets side in this bearish time.”

Coinbase will push out several employees from Neutrino following online criticism over the crypto exchange’s acquisition of the blockchain analytics firm.

Coinbase’s CEO Brian Armstrong announced in a blog post on Monday that Coinbase and Neutrino have decided they will let go Neutrino’s employees who had ever worked for an IT startup called Hacking Team, whether or not they still have any current affiliation with the startup.

It’s currently unknown how many of Neutrino’s employees had worked for Hacking Team, except the Neutrino’s management including CEO Giancarlo Russo, CTO Alberto Ornaghi, and CRO Marco Valleri.

The announcement came after online criticism of Coinbase’s decision to buy Neutrino, which was reveled on Feb. 19.

Since then an online controversy has been raging on Twitter due to the fact that Neutrino’s top management had led projects for Hacking Team, a startup who aided governments known for human rights abuses.

Armstrong said in the post on Monday: “We had a gap in our diligence process. While we looked hard at the technology and security of the Neutrino product, we did not properly evaluate everything from the perspective of our mission and values as a crypto company.”

As a solution, he concluded:

“Those who previously worked at Hacking Team (despite the fact that they have no current affiliation with Hacking Team), will transition out of Coinbase. This was not an easy decision, but their prior work does present a conflict with our mission.”

A cryptocurrency project that appears to have raised at least $20 million through a referral-based marketing scheme has been advertising false information about its team members, a CoinDesk investigation has found.

Launched on Dec. 2, BHB claims to offer an ethereum-based solution for peer-to-peer lending, but by Jan. 18, local media reports were already accusingthe project of operating an illegal pyramid scheme. Now, CoinDesk is able to reveal inconsistencies in the information provided about its founding team that further suggest something may be amiss at the China-based project.

In particular, CoinDesk has found that images said to represent two BHB team members have been lifted from unaffiliated university professors, who are now publicly denying any association with the project.

According to web materials, alleged team members include a financial engineer named Bobby White, a blockchain expert named David Chen and a product designer named Gregory Moss. The respective images of each individual were featured on BHB’s website, bgepay.com. (The project appears to have taken down the website.)

However, the image of Bobby White used in BHB’s marketing materials is identical to that of an economics professor at China’s Tsinghua University namedAlexander White. Meanwhile, the image of Gregory Moss is the same as one used by a philosophy professor at The Chinese University of Hong Kong, who is also named Gregory Moss.

In responses to CoinDesk inquiries, both professors denied any association with the scheme and both stated they had no prior knowledge of the BHB project.

White said:

“Any use of my photo for such purposes, including attached to the name ‘Bobby White,’ is fraudulent.”

Professor Moss, too, said he is very “troubled” by the incident, claiming he never gave BHB permission to use his image or likeness in connection with marketing its products.

CoinDesk was not able to independently verify the image associated with a third alleged team member named David Chen.

Besides false information about its team members, the project listed invalid contact details on its website, including a disconnected phone number and a supposed headquarters at a New York City address that does not exist (“22/121 Apple Street”).

An unusual model

Adding to concerns is the mechanism for how BHB tokens are issued and promoted at a single exchange, XBTC.CX, whose business appears tied to the BHB project.

Investors are not able to mine or receive BHB tokens through programmatic means. They can only buy these tokens using the U.S. dollar-pegged cryptocurrency known as tether or USDT on XBTC or Chinese yuan through XBTC’s over-the-counter WeChat groups.

XBTC.CX, the only exchange that lists BHB tokens, began its offering on Dec. 2,explaining at the timethat users who held at least 700 BHB for 24 hours were eligible to get a dividend issued in USDT that would equal 7 percent of their BHB holdings’ market value.On Dec. 5, the exchangeannouncedit would reduce that reward rate to 1.3 percent.

(Some of XBTC’s web pages related to BHB block IP addresses in the U.S. and U.K.)

Further, the same announcement on Dec. 2 said BHB holders could get additional USDT if they recruited other users to the exchange and had them hold BHB in an account.

In this case, XBTC.CX said anyone who could sign up a user that held a balance of at least 700 BHB would be eligible to receive an additional 1.5 percent of the new account’s BHB value in the form of USDT. The offer suggested these USDT payments would then occur daily.

If the same user managed to sign up yet another account to the exchange, then they could receive an additional 1 percent of the second account’s BHB holdings every day.

Although users do not have to pay a membership fee to their referrers, the project appears to rely on raising capital from new participants so that promised dividends and commissions for existing accounts can be continuously paid out.

This element of the scheme is notable, as it has attracted comparisons to multi-level marketing (MLM) and pyramid schemes, the latter of which is illegal in China.

Dozens of users on Chinese social media Weibohave beenposting threads and raising doubts on the legality of the project, alleging it’s just a disguised pyramid scheme because it’s using latecomers’ money to pay for what early participants were promised.

China’s central government enacteda regulation in 2005 strictly prohibiting what it calls Chuanxiao, or “pyramid selling,” in the country. Based on an English translationprovidedby the law school at Peking University, the regulation defines pyramid selling as follows:

“An organizer or operator seeks for unlawful interests by recruiting persons to participate in pyramid selling, asking the recruiters to persuade others to participate in pyramid selling so as to form a multi-level relationship, and calculating and paying the remuneration (including material awards and other economic interests) to an upper-level promoter on the basis of the sales performance of the promoters below.”

Links to MoCapital

But while the veracity of the advertised team may be in question, WeChat groups have linked both BHB and XBTC.CX to at least one real person – Renbing Li, the 24-year-old founder of the Hangzhou-based venture firm MoCapital.

In a WeChat response to CoinDesk, Li denied allegations BHB is a pyramid scheme and said it’s rather a project to “liberalize communities.” He did not respond to further questions.

The XBTC exchange did not reply to CoinDesk’s email request for comment.

According to photos and video clips from a BHB project gala held on Jan. 25, obtained by BHB users and reviewed by CoinDesk, Li appeared onstage at the Azure Qiantang luxury hotel in Hangzhou where he referred to himself as the founder of BHB.

The gala featured lucky draws meant to reward winners with Rolls-Royce and Bentley luxury cars, as well as 3 million yuan (about $450,000) in cash. Only XBTC.CX users with more than 10,000 BHB and who signed up more than 10 other users to the exchange – each holding more than 700 BHB – were eligible to attend.

And Li’s association with XBTC.CX and BHB is traceable in other ways not tied to the event.

The MoCapital domainis registeredby a firm called Moha Technology based in the city of Jinan in China’s Shandong province. According to China’sbusiness registrationdatabase, Renbing Li owns Moha Technology.

The Jan. 25 event at the Hangzhou hotel was also registered under the name of Moha Technology, according to a customer representative of the hotel.

Further investigation shows that Moha has a fully-owned subsidiary in China called Bihang Blockchain based in Hangzhou, which invested in XBTC, according to a verifiedjob postby Bihang on a third-party recruiting agency.

$20 million raised

However, while some are raising the alarm about the project, others have been cashing in –datafrom XBTC shows $21 million in BHB is now changing hands daily for USDT.

Following the initial listing, XBTC had been publishing daily updates on dividend payouts, touting how many users had received a dividend each day. On Jan 24, the exchangeclaimeda total of 25,732 users on the platform received dividends.

With a minimum reward threshold of 700 BHB, the project’s exchange-based referral program would have attracted those 25,000 investors to purchase at least 18 million of the tokens.

And data from XBTC showed the initial listing price for BHB was about $1.10 on Dec. 2, which later doubled within just a month. Even assuming all the investors bought in during early December, that would put the proceeds at around $20 million.

However, signs suggest that enthusiasm may be slowing.

On Jan. 27, two days after the gala, a major sell-off took place on the exchange, which resulted in BHB dropping from $1.70 to as low as $0.60 within an hour. It then further plunged to $0.20 in the next two days.

Following that, XBTC said on Jan 28 and Jan 29 that the number of users who received payouts dropped to19,873and17,358, respectively.

To prevent a run on the proverbial bank, the exchange abruptlyannounced on Jan. 31 it would suspend paying out dividends and freeze all BHB withdrawals during the Chinese new year in early February, and would only reopen withdrawal gradually afterward.

That note apparently calmed investors, as afterward the price of BHB rose to $2 within just two days. But the exchange has made no updates on the status ever since, regarding further dividends or withdrawal.

Further, while trading for BHB against USDT is still enabled on XBTC, users in BHB’s WeChat groups have been complaining that since early February the project has also frozen BHB investors’ withdrawal requests for USDT.

The project has made no announcements on the issue. Representatives of the project told investors in the WeChat groups that it’s working to resolve the matter by March 6, but did not give further details.